On April 1, there were some significant policy changes to VAT in China. With a simmering trade war against the United States, sluggish global demand, and a domestic debt overhang, the changes to value-added taxation were meant to spur economic growth by helping both businesses and consumers. Since the nation is the second largest economy in the world, changes within the country’s tax policy will also affect other continents, Europe included.
We’ll be taking a look at the main policy revisions, and how they’re likely to affect both the domestic and international economies.
The primary changes to VAT in China
Starting April 1, the standard rate of VAT in China was cut from 16% to 13%, providing the most sizeable benefits to manufacturers. The standard rate of 10% applying to retail services was also reduced to 9%, while the third rate of 6% applying mostly to finance and IT remained unchanged.
The changes are summarised in the table below.
|Old Rate||New Rate||Goods/Services Affected|
|16%||13%||All other goods and services|
|10%||9%||Retail, entertainment, hotel, restaurants, real estate and construction, telephone communications, postal services, transport and logistics|
|6%||6%||Financial and insurance services, internet data, IT services, consulting|
China employs several other rates that apply to certain construction services, education, and luxury items, but these have remained unchanged so far. However, in 2020, one of the rates mentioned above is set to be eliminated, leaving just two standard rates in the country.
Impact on the domestic economy
The effects following the changes to VAT in China are already measurable as far as the local economy is concerned. Most of the benefits have been reaped by the manufacturing sector, with tax policy alterations this year alone saving businesses and individuals 524.5 billion yuan from January to April. The value-added tax changes enacted on April 1 created savings of 111.3 billion yuan for companies.
The manufacturing sector took in savings of 47.6 billion yuan in April, and these benefits will be passed down the supply chain to help other enterprises and the final consumer. Thus far, the manufacturing sector has accounted for 40% of the reductions.
The cuts have also been a major boon to import businesses, with various provinces in the country seeing positive results. As of now, 4,000 enterprises in the Liaoning province and 1,500 in Guangdong have managed to improve their financial positions.
The country’s tax code has changed in other areas as well, with income taxation and small business (SMEs) regulations being revised. As an example, more than 20 million SMEs have received tax relief through a variety of preferential policies.
Impact on the global economy
As soon as the government announced changes to VAT in China, multinational corporations immediately responded with price drops in the country. Major carmakers such as Mercedes-Benz, BMW, and Volvo cut retail prices to remain competitive in the local market.
Foreign businesses with production bases in the country are likely to see decreases in business expenses, which will help improve profit margins if the savings aren’t passed on to consumers through lower prices.
However, these outcomes haven’t been as evident just yet, with the critical hindrance being the United States’ placement of tariffs. In May, the country’s exports are said to have declined by 3.8% from a year earlier, with imports taking a similar fall as well.
The US-China trade war, which has the potential to escalate, is likely to stifle most of the benefits to businesses around the world, Europe included. The Chinese government will have to take further fiscal and monetary policy measures to revitalise the economy, and if that fails, a global recession is in the making given the proportion of global GDP taken up by the country.
An uncertain future
While the reforms to VAT in China were intended to stimulate growth at home and abroad, tense bilateral relations have made the desired outcomes less likely. Further changes to value-added taxation are possible both in China and around the world as governments look to prevent an economic downturn.
As a result, businesses will struggle to keep track of all the changes to rules and regulations, making an automated VAT recovery solution like ours extremely beneficial. While we specialise in EU VAT refunds, we’re also active in the EEA, USA, Asia, and beyond.